Swap Dealers Unsettled Over Margin Rules

Terry Flanagan

Swap dealers are facing new rules for calculating margin for uncleared swaps, i.e., those swaps that are executed and settled bilaterally rather than being centrally cleared.

The Basel Committee on Banking Supervision and the International Organization of Securities Commissions have established a December 2015 deadline for national regulators to come up with rules that conform to guidelines issued by BCBS/Iosco for calculation of initial margin and variation margin.

“There’s been a lot of buzz about the new margin requirements, which are going to require a complete overhaul of every facet of collateral management, from legal documentation to systems to trade pricing to actual collateral management itself,” Mahesh Muthu, assistant principal at OTC processing company eClerx, told Markets Media. “They’re slated right now to start taking effect at the end of 2015, and several aspects of them will be phased in based on the trading volume of counterparties that are trading uncleared derivatives.”

The Working Group on Margin Requirements (WGMR) has developed a methodology for initial margin which could be used by market participants.

A common methodology would have several benefits to the market, the WGMR said in a report last December, such as permitting timely and transparent dispute resolution and allowing consistent regulatory governance and oversight. In order to realize these benefits, agreement between market participants and global regulators on several key assumptions will be required.

Isda member firms participating in the WGMR implementation initiative are concerned about the market’s ability to meet an implementation date of December 2015. This concern is based not only on the significant infrastructural changes required of market participants but also due to the significant coordination effort required of global regulators.

Isda has suggested that the timelines be pushed out by two years. “One of the main reasons is the regional rules aren’t anticipated to be documented until sometime next year, which obviously leaves very little time frame for documentation,” said Muthu. “The second reason that they cite is the vast amount of re-engineering of systems, processes, and legal documentation that will be required to actually facilitate the process that’s laid out by the rules.”

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